Cap-and-Trade or a Carbon Tax for Greenhouse Reductions?

By Kennedy Maize

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Will cap-and-trade—setting an ever-declining limit on emissions and then letting a commodities market sort out the distribution—rule the day? It’s the chosen method of the Obama administration and many Democrats in Congress to deal with carbon dioxide emissions. That’s the approach in the mammoth Waxman-Markey bill that has cleared the House Energy and Commerce Committee. But it faces difficulties in other House committees, including the powerful House Agriculture Committee.

Or will the allegedly simpler notion of a straightforward carbon tax, now the darling of much of the conservative punditry, some on the environmental left, and many in the electric-generating community, prevail? So far, it’s a toss-up.

Fred Hiatt, editorial page editor for The Washington Post, outlined the choice in a recent op-ed. He observed in early June, “Most economists would say the sensible approach would be to levy a tax on oil, gas, and coal and then get out of the way. Higher prices for those fuels would discourage use and encourage investment into wind power, conservation, and other good things.”

But cap-and-trade, largely built on the model of the SO₂-trading regime of the 1990 Amendments to the Clean Air Act, has political leverage and intellectual backing. It’s the favorite of many congressional Democrats (who fear a “new taxes” attack from Republicans if the alternative energy tax gets proposed). It’s the choice of CO₂-reduction mechanisms in the enormous bill that passed Henry Waxman’s committee in late May after many compromises to shape the bill to meet coal-state interests.

The Post’s Hiatt concluded, “Democratic leaders in the House have fashioned a 946-page climate change bill that forces industries to pay to exceed a gradually declining limit on carbon emissions. It’s a tax with deniability, and with huge enforcement challenges.

“In theory, it could work; some economists even prefer it to a tax because you can set a clearer emissions target. But if you’re going this route, design becomes crucial. During his campaign, Obama proposed to auction off the pollution permits. But to buy support in the House—where the bill has made it through only one committee so far—the bill’s authors had to promise to give away 85 percent of the allowances.”

Environmentalists, who once opposed the very notion of “pollution trading,” have joined the industry cap-and-trade advocates. Many electric utility firms, but not all, have also bought into carbon trading.

In Europe, CO₂-emissions trading has been in effect for years, but it’s still a small market and may not be instructive for the U.S., according to the experts. The European Union market is limited to its member countries and critics argue that it’s without any bite in terms of actual greenhouse gas reductions. Yet the market is functioning and demonstrating that CO₂ reductions are declining in value.